Limited Company Directors

Mortgages are available to Limited Company Directors

Let's start by exploring what exactly a limited company is and how directors' roles within these entities are defined.

A limited company is a distinct legal entity that is separate from its owners (shareholders) and directors. Unlike sole traders or partnerships, limited companies offer their directors limited liability protection, meaning their personal assets are typically safeguarded in the event of business debts or legal issues.

Directors of limited companies hold a pivotal role in the operation and management of the business. While they may have ownership interests in the company, they are primarily responsible for making strategic decisions, overseeing day-to-day operations, and ensuring compliance with legal and regulatory requirements.

It's important to recognize that, from a legal standpoint, directors are considered employees of the company, albeit with distinct responsibilities and obligations. This designation carries implications for how directors' income is assessed when applying for a mortgage, as traditional lenders may have specific criteria and requirements tailored to self-employed individuals or those with non-standard income streams.

You can be a Director and have no shareholding and in those circumstances you would be regarded as employed

However you may also hold a shareholding in the company and this will entitle you to a share of the profits in proportion to your shareholding

Whether you are regarded as self employed or employed will depend on your shareholding and the nature of your income

If you hold a relatively small number of shares - say under 20%, you will be regarded as employed and your income will be assessed as your salary plus any bonuses or additional pay.

If you own a higher shareholding, you will tend to be regarded as self employed and your income will be based upon your Directors salary plus any dividends drawn.

But it may be the case that you do not draw out all of your profits as dividends . We have access to lenders that will base there lending on the net profit showing on your business accounts

For a limited company, the mortgage lender will look at both the directors salary plus the dividends drawn. The dividends drawn should not exceed the net operating profits of the limited company

At Mortgages Direct, we can advise which is the best route for your situation. Fill in the Mortgage Enquiry  form now

Minimum deposit for a Limited Company Director

The minimum deposit for a Limited company Director is NO deposit!!

However, with NO deposit the deals on offer are limited to 5 year fixed rates

Furthermore you will need at least 2 full years accounts or 2 years Inland Revenue statements of income (SA302) 

A wider range of deals is available if you can raise a 5 or 10% deposit

What is the deposit for a Director with just one years accounts or SA302?

The minimum deposit with one years accounts or Inland Revenue statement of income is 5%

What deposit should I put down

You should put down as large a deposit that you can afford, bearing in mind the following.

You should reduce or clear any credit card debt

Credit card debt that is not cleared on a monthly basis is often charged at very high interest rates. You should aim to clear this at the earliest opportunity

Credit card and loan debt will reduce the amount you are able to borrow

Lenders interest rates are typically linked to deposit bands that increase by a multiple of 5%

For example, you can expect lower mortgage rates if your deposit is 15% than if you had a deposit of 10%

But if your deposit is 12%, you will be offered the same rates as if you had a 10% deposit

Another consideration is if you put all of your savings towards a deposit - what would you do if you were to lose your income?

Your savings provide a means of paying your mortgage and bills if there is a problem with your income

Can I use a Directors Loan as a deposit

You can draw out retained profits from your business as a dividend and that is absolutely fine. But if you draw out money as a Director's Loan this will be a problem with most lenders. The main issue is that it is a loan, and loans are generally not acceptable as a deposit source.

However, there are lenders that will consider a loan as a deposit source and you should contact us with your Mortgage Enquiry

How much can be borrowed by a Limited Company Director

As a guide, Mortgage lenders may lend up to 4.5x's your income, where your income is your Directors salary plus dividends. For a joint mortgage application it may be up to 4.5 x's the joint income.

In certain limited situations it may be possible to borrow up to 6 x's your income

This is just an indication. Some lenders may lend more in certain circumstances. Some lenders will have a lower limit. Please fill in our Mortgage Enquiry if you are hoping to maximise your borrowing

The maximum mortgage borrowing will be ascertained by assessing your income and outgoings

A number of factors are considered...

Director's Income

Your Directors salary will be shown on your latest Inland Revenue statement of Income. 

Also shown will be any dividend income drawn

Lenders may simply add together these elements then take an average over the last 2 years

But not all Directors will draw out all of their profits as dividends

Some Directors will leave the profits in the company. These profits are termed retained profits

In this situation, we are able to find lenders that will use Directors salary plus share of net profits

The share of net profits may be averaged over 2 years, or with certain lenders we can use the latest net profits

If profits are declining it is likely the most recent years profits will be used or the application will be declined!!

Lenders may be concerned if your business profits are reducing. Is this declining trend likely to continue or is there a unique reason for the down-turn.

For example, Covid19 will have affected many businesses adversely, but it is reasonable to expect that for most businesses, things would improve as the situation returns to normal

Your dividend income from self employment will be clearly listed on your Tax statement of Income

There may be other items of income that may also be acceptable income

For example you may have a second income.

You may have income from land and property (buy to let property). This may be acceptable by some lenders

If the mortgage application is in joint names and your partner has an income then this can be added to your income (for the purposes of establishing your borrowing potential.

Benefit income, including child benefit may also be allowable

Next we look at your Outgoings

Personal Outgoings

Personal outgoings are the monthly outgoings that you pay each month. These may include Loan and credit commitments, Food, clothing and household expenditure. Council tax and Utility bills (Gas, Electric, Water and Telephone). Education, Commuting and Car expenses. Insurance and Pension commitments. Other Leisure and Social expense.

Directors Expenses

Your business profits equal your gross income minus your business expenses

The Business expenses are already factored into your net profits. You should take care not to double count these expenses.

For example, if you use your car in the course of your business you do not need to include 100% of your car outgoings. If the business use is 50% then you only need to declare 50% of your costs as a personal expense

Your New Mortgage Payments

Your new mortgage will have a monthly payment but Lenders will not use this in their calculation. 

Mortgage lenders have to check that your mortgage is affordable in most situations so they will 'stress test' your mortgage

Typically lenders will apply a notional mortgage interest rate that is higher than the current charge rate. The idea being to check that your mortgage is affordable in most circumstances. For example, the lender may apply a rate equal to the lenders standard variable rate + 2%.

Affordability for a Director

The affordability check is quite straightforward. Calculate your monthly net income. Sum up your monthly outgoings. Add the new mortgage payments at a suitable stressed rate and there should be a surplus left over.

For a self employed person, your income may be irregular which will complicate this calculation. And it may be sensible to ask yourself what is a reasonable monthly drawing you could safely pay yourself

Maximum borrowing for a Director

To establish your maximum borrowing potential, you can contact us, by filling in the Mortgage Enquiry form

Important Considerations for Directors when taking out a mortgage

Viability of your business

You are ultimately responsible for maintaining your mortgage. A Mortgage Adviser can advise based upon your previous income but can't be expected to assess the viability or future prospects of your business.

Does most of your income come from one or two sources. What would you do if for some reason these sources dry up.

It is often a good idea NOT to rely on a single source of income, unless you are confident you can replace that income

It is not possible to identify all future threats to your profits but you should consider what you would do in the event of a downturn

Income Tax

Always keep in mind that you MUST keep back money for INCOME TAX. The Inland Revenue are unlikely to be sympathetic if you have spent all the profits!! even if it is on your mortgage.

You are ultimately responsible for keeping up your mortgage payments, so they need to be at a level that is sustainable

Emergency Fund

Although this is the last item it is perhaps the most important

You need to keep back an emergency fund for periods when your income is reduced

It is recommended that you keep back a minimum of 6 months income in an accessible account. This will give you 6 months to make other arrangements.  

The old expression 'make hay when the sun shines' could be interpreted that you should save as much as you can when times are good - you may need those savings in the future